Barita Insights: Weekly Newsletter October 5, 2020

Analyst Insights

The US economy continues to gradually bounce back from its pandemic lows; however, a pickup in virus cases coupled with a lack of further support from the US government could weigh on the pace of the recovery in upcoming months. The path ahead remains uncertain, and the forthcoming elections have led to volatility in equity markets. Jobless claims point to a slowdown in the labour market recover. With much of the initial boost from business reopening fading, American’s are still focused on the pace of the recovery as they should be. However, there is one crucial fact that many are missing; the market fallout from COVID-19 will likely forever change how investors allocate assets in their portfolios.

A general rule of thumb is that a well-balanced portfolio is composed of 60% stocks and 40% bonds; however, this will no longer hold water in our current economic environment. Investors seeking long-term capital appreciation are not going to be able to rely on exposure to just two assets classes. Notable, before the COVID-19 pandemic, the combination of rising debt levels and central banks efforts to control inflation had already begun to weaken the fixed-income markets. 

The US Government has now reached over US$2.5 trillion in coronavirus-related stimulus spending and they are exploring the option to add a second stimulus package to further support their economy. It is difficult to comprehend that adding trillions of dollars to an already sizeable federal debt is sustainable at a time when corporate tax collection and household income will decrease sharply due to the economic environment. Secondly, The Federal Reserve (“Fed”, the Bank of America) decision to deploy capital into the markets would ultimately decrease yields on treasury bonds and other similar fixed-income investments in the future. The Fed’s balance sheet has increased to approximately US$6.6 trillion, growing by almost 54% in two months. Also, the Fed has reduced its interest rate range to 0% – 0.25% in an effort to help fight the panic set on by the crisis. However, as interest rates near zero, it is evident that bonds simply cannot replicate the historic levels of income investors need, especially those in retirement. Investors are now turning their attention to corporate bonds in pursuit of higher yields. Unfortunately, the COVID-19 pandemic will put pressure on corporate earnings and hence make corporate equity investments and corporate bonds risker. 

While investors must adapt to our changing environment, one must question how a COVID vaccine discovery can affect various asset classes? While the general expectation is that a vaccine will boost the economy, the impact may not be positive for all investment asset classes. For instance, gold may correct post-COVID as the price was supported by the uncertainty over the pandemic. The US equity market has seen a sharp recovery from the lows in March. We do believe that the discovery of a vaccine will be positive for the US equity markets, but there may not be a substantial rally as seen before. However, we expect our local market to rally on news of a vaccine as this would give local investors a promising outlook on the recovery of our economy. Debt investments are unlikely to be affected, and interest rates are likely to remain low for a while given the economic impact caused by the coronavirus pandemic. Governments across the world are racing to discover a vaccine for COVID. Investors must position themselves across asset classes that are not only in line with their objectives but also keeping in mind how the risk associated with various assets have changed as a result of the pandemic.

 

Written by Jonathan Cook, Research Analyst

Conclusions

A general rule of thumb is that a well- balanced portfolio is...

A general rule of thumb is that a well- balanced portfolio is composed of 60% stocks and 40% bonds, however this will no longer hold water in our current economic environment

We expect our local market to rally on...

We expect our local market to rally on news of a vaccine as this would give local investors a promising outlook on the recovery of our economy.

Debt investments are unlikely to be...

Debt investments are unlikely to be affected and interest rates are likely to remain low for a while given the economic impact cause by the coronavirus pandemic.

Investors must position themselves...

Investors must position themselves across asset classes that are not only in line with their objectives but also keeping in mind how the risk associated with various assets have changed as a result of the pandemic.

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